Opec oil ministers head to their meeting in Vienna to morrow facing a long road ahead before they can expect to reach their objective of a more balanced oil market.
Although the first few months of their output-reduction deal has shown some success, many analysts see it taking at least until next year before supply curbs can catch up with gently rising demand to start sufficiently reducing the oil glut from historically high levels.
“The second half of the year is looking pretty decent with or without the Opec cut, but it is when you look into next year, that is our real concern,” said Alexander Poegl, the head of business development at JBC Energy consultants in Vienna.
Oil demand reaches its seasonal peak in the northern hemisphere during the summer months – the “driving season” – on top of which refiners are expected to sharply increase crude runs through August as plants come out of this year’s heavy maintenance schedule.
But clouds start to gather toward the end of the year.
As Mr Poegl pointed out, the peak addition of new non-Opec supply over the 2016-2018 period will come in the first three months of next year, when new projects coming onstream in Brazil, the United States, Canada and in United Kingdom/Norway North Sea will add as much as 2 million barrels per day (bpd) – and none of those countries are among the 11 non-Opec members that have supported Opec’s efforts.
That scenario has not been lost on Opec policymakers, who have been aware that it is a race to balance the market with their cuts before others can fill the gap, thus simply leaving them ceding market share.
Jeff Currie, Goldman Sachs’ head of commodities, said this week that Opec needs to help engineer a “backwardation” in the market – where prices for oil delivered near-term are significantly higher than future delivery. Higher long-term prices have encouraged producers, especially in the US shale sector, to sell forward and lock in margins, thus making it easier to finance their efforts.
But, Mr Currie said, the market needs to expect a near-term shortage to move to backwardation.
That is why the talk of a deeper cut by Opec and partners, at least in the short-term, is on the table, as well as extending the deal through March of next year.
“All options are on the table,” said Essam Al Marzouq, Kuwait’s energy minister and the architect of last year’s deal.
“If necessity arises, we could increase the output cut,” he told the state Kuwait News Agency.
Suhail Al Mazrouei, the Minister of Energy, echoed that in Abu Dhabi before flying to Vienna, saying the group would do what was necessary to bring down inventories.
The tough choice, especially for those bearing the brunt of the cuts – Saudi Arabia, Kuwait, UAE and Iraq account for 80 per cent of Opec’s, while Russia’s are more than half of non-Opec cuts – is that their efforts may take even longer than nine more months to bear fruit.
“If Opec and its partners keep their cuts in place until the first quarter of next year but then resume production growth once the deal expires, the market will certainly move back in to surplus of around 500,000 bpd,” said Ed Bell, a commodities analyst at Emirates NBD.
“Commercial inventories will still remain substantially above their five-year average even if demand accelerates beyond our current expectation. At that point Opec and its partners will need to face the uncomfortable decision of cutting further or prioritising access to markets.”
amcauley@thenational.ae
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